Variance Vulnerability, Background Risks, and Mean-Variance Preferences

Eichner, Thomas; Wagener, Andreas

doi:10.1023/a:1026396922206

Cited by 32 publications

(43 citation statements)

References 22 publications

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“…Although these papers -as well as many others in the fieldare written in an expected utility framework, it is worth mentioning that sometimes also a non expected utility approach is adopted. See, e.g., Eichner & Wagener (2003.…”

Section: Introductionmentioning

confidence: 99%

Correlated risks, bivariate utility and optimal choices

2009

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In this paper, we consider a décision-maker facing a financial risk flanked by a background risk, possibly non-financial, such as health or environmental risk. A decision has to be made about the amount of an investment (in the financial dimension) resulting in a future benefit either in the same dimension (savings) or in the order dimension (environmental quality or health improvement). In the first case, we show that the optimal amount of savings decreases as the pair of risks increases in the bivariate increasing concave dominance rules of higher degrees which express the common preferences of all the decision-makers whose twoargument utility function possesses direct and cross derivatives fulfilling some specific requirements. Roughly speaking, the optimal amount of savings decreases as the two risks become "less positively correlated" or marginally improve in univariate stochastic dominance. In the second case, a similar conclusion on optimal investment is reached under alternative conditions on the derivatives of the utility function.

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Section: Introductionmentioning

confidence: 99%

Correlated risks, bivariate utility and optimal choices

2009

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“…Lajeri and Nielsen [25] and Ormiston and Schlee [26] identify S as the two-parameter analogue of the Arrow-Pratt concept of absolute risk aversion. Eichner and Wagener [27] [28] investigated properties of S further.…”

Section: The Modelmentioning

confidence: 99%

The Impacts of Joint Energy and Output Prices Uncertainties in a Mean-Variance Framework

Alghalith¹,

Niu²,

Wong³

2017

TEL

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In this paper, we analyze the impacts of joint energy and output prices uncertainties on the inputs demands in a mean-variance framework. We find that the concepts of elasticities and variance vulnerability play important roles in the comparative statics analysis. If the firms' preferences exhibit variance vulnerability, increasing the variance of energy price will necessarily cause the risk averse firm to decrease the demands for the non-risky inputs. Further, we investigate two special cases with only uncertain energy price and only uncertain output price. In the case with only uncertain energy price, we find that the uncertain energy price has no impact on the demands for the non-risky inputs. Besides, if the firms' preferences exhibit variance vulnerability, increasing the variance of energy price will surely cause the risk averse firm to decrease the demand for energy.

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“…To better understand this, it is useful to employ concept of variance vulnerability, due to Eichner and Wagener (2003). An agent is said to be variance vulnerable if she reduces her risky activity in response to an increase in an exogenous variability of her wealth; such increases can be caused by the increase in a genuine background risk or, as here, by an increase in the covariance of the risks the agent faces (observe that ∂σ y (q)/∂σ xz > 0).…”

Section: Changes In the Dependence Structurementioning

confidence: 99%